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It's good to know in advance whether your business is going to be profitable. A financial plan can help you make things clearer for yourself, or for your bank if you're applying for a loan.
The financial plan
A financial plan is a useful tool for determining whether your business idea is viable. It's also useful for convincing financiers to lend you money, and therefore forms the basis for your financial pitch.
Creating a financial plan doesn't have to be complicated. Base it on your business plan and keep it simple. Targeted market research and a sound marketing plan should be part of your business plan. These will help you create a solid basis for your figures.
It's important that you work out as much of your financial plan as possible yourself. Discussing it with an expert, such as your accountant, can also help you prepare for the next step – approaching financiers or investors.
What should a financial plan include?
A financial plan consists of five budgets that detail the minimum requirements for starting your business, the investments you'll need to make and how you plan to finance them. This will allow you to determine whether your business idea is viable. What turnover do you expect to generate? And will your business be profitable, or not? It also forces you to examine cash flow and whether you'll have enough cash each month. Answering all these questions in your business plan is the key to your success.
Your investment budget should include a list of the investments you'll need to start your business and those that can wait until a later stage. This is an indicator of the minimum amount you'll need to get started.
Your financial budget should detail how you intend to finance your investment budget. Options include personal capital (equity capital) or loans, e.g. from a bank (borrowed capital), or even a combination of the two.
Your operating budget should show that your business is profitable. This will allow you to estimate your turnover. You can then analyse the costs to keep your business running. Combining these, you can determine whether you'll make a profit or a loss.
Cash flow budget
Income and expenditure can fluctuate greatly over a year. Your cash flow forecast should include all income and expenditure over a given period, e.g. per month or per quarter. This will highlight when you'll have surplus cash and when you'll need extra funds.
Personal expense budget
One option is to determine how much personal capital you have and then base your financial plan on your personal situation. This involves calculating how much you'll need for you and your family, how much you will have to pay in tax and what your operational costs will be. This allows you to work out your minimum turnover to make ends meet.
What do financiers look for?
Financiers look at both 'hard' and 'soft' factors when they analyse a credit application. Hard factors relate directly to your business and the basis upon which you plan to build it. Soft factors relate to you and your qualities as a business owner.
Prepare a good presentation that demonstrates you've familiarised yourself with the financier's use of language and information requirements. Financiers will examine your application based on the following points:
- Business owner assessment. Who is the credit applicant?
- Business owner's qualities and experience
- Quality of the business plan and its financial basis
- Company history, e.g. turnover, gross profit, cash flow, etc.
- Industry or sector. What trends and developments exist within this sector or industry?
- Type of loan. Loan size and duration
- Purpose. What will the loan be used for?
- Strict budget and financial obligations. Do you have a clear picture of the revenues required to meet both your financial obligations – business and personal alike?
- Cost structure. Do you have a clear picture of your business's costs?
- Repayment capacity. Will you be able to meet your repayment obligations without jeopardising your business?
- Return potential. Do you have a clear picture for your business's future growth?
- Financial structure
- Personal expenditure
- Market analysis by an independent body
- Market research and industry information
- Security. What security can you offer to ensure that you'll be able to repay your financier?
- Put your own equity into the business as well, if you can, as this will help convince financiers and other parties.
- Negotiate the terms and conditions of your financing package. Repayment terms can be just as important as the financing package itself.
- Improve your chances of success by supporting your application with a pitch.
- Determine what financing options exist.